Depending on how fiscal cliff negotiations between Congress and the White House go, next year is either going to be a very good year for the U.S. economy or a very bad one, Federal Reserve Chairman Ben Bernanke told an audience at the Economic Club of New York on Tuesday.
Bernanke, who coined the popular phrase, “the fiscal cliff,” warned lawmakers that the U.S. economy is at risk if they fail to cut to stave off spending cuts and tax hikes automatically slated for next year.
“The Congress and the Administration will need to protect the economy from the full brunt of the severe fiscal tightening at the beginning of next year that is built into current law,” Bernanke said. A failure to act “would pose a substantial threat to the recovery” and would, by the reckoning of analysts at the Congressional Budget Office and elsewhere, “send the economy toppling back into recession.”
In contrast, if lawmakers can reach a deal quickly, he suggested that 2013 could be a good year for the U.S. economy. “Cooperation and creativity to deliver fiscal clarity . . . could help make the New Year a very good one for the American economy.” - Read the speech at The Federal Reserve
GOLDMAN: TWEAKING TAX CUTS ON THE RICH The Bush tax cuts for upper income earners are likely heading for the chopping block as fiscal cliff negotiations heat up, but there are still a few alternative compromises that could be on the table, according to Goldman Sachs’ Alex Phillips.
“While we would expect that the White House would be slightly flexible on the top rate–either accepting a higher threshold or perhaps a slightly lower rate than initially proposed, it seems unlikely that the president would accept an agreement that does not include most of the revenue that would be gained from expiration of the top two tax brackets ($836 billion over ten years).” Phillips wrote in a research note on Tuesday.
Phillips said several alternative compromises could include a phase out of deductions based on income, which if applied at a 3 percent rate for every dollar over a threshold, could raise $121 billion over ten years. Another alternative could be a limitation of the value of deductions to the benefits as if they were in the 28 percent bracket. “For example, a taxpayer with a 36 percent rate who deducts $10,000 would lower her tax liability by only $2,800 rather than $3,600, which could raise $573 billion over a decade.” The third alternative could be a dollar cap on itemized deductions, which was proposed by Republican presidential candidate Mitt Romney, and would raise an estimated $1.29 trillion over 10 years if applied at a $25,000 cap. - Read more at The Wall Street Journal
KISS 3 PERCENT GDP GOODBYE In a depressing quarterly letter to his clients at the Boston-based investment firm, Grantham Mayo Van Otterloo, investor Jeremy Grantham writes that U.S. economic growth will be less than one percent for the next 40 years, in contrast to the above 3 percent growth the economy has been accustomed to for more than a hundred years.
“Investors should be wary of a Fed whose policy premised on the idea that 3 percent growth for the U.S. is normal. Remember, it is led by a guy who couldn’t see a 1-in-1200-year housing bubble!” Grantham writes. - Read more at Business Insider
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